Health-Care Costs for Retired Couples Drop by 8 Percent

Dr. Martha Perez examines a patient at Community Health of South Florida.

After years of increasing health-care costs, the outlook is improving for seniors worried about paying their medical bills during retirement.

For the second time in three years, estimated medical expenses for new retirees have fallen, according to a study released Wednesday by Fidelity Investments. A 65-year-old couple retiring this year would need $220,000 on average to cover medical expenses, 8 percent less than last year's estimate of $240,000. The study assumes a life expectancy of 85 for women and 82 for men.

Fidelity attributes this year's decrease to several factors, including lower health-care spending that hasn't rebounded along with the economy.

"When times are tough, people tend to cut back on health-care expenditures," said Sunit Patel, a senior vice president in Fidelity benefits consulting group. "I think what surprised many people is that in recent years, even as the economy recovered, you've still seen a fairly significant slowdown."

Patel stressed that although fewer doctor visits can save seniors money, skipping necessary care can lead to more serious health problems and steeper bills down the road.

The 2013 decrease is significant, as Fidelity's estimates increased an average 6 percent per year between 2002 and 2012. The estimate had fallen only once before, in 2011, because of changes in the Obama administration's health-care overhaul that reduced seniors' out-of-pocket spending on prescription drugs.

Fidelity's projections assume that a 65-year-old couple retires this year with Medicare coverage and no additional coverage from former employers. The estimate factors in the federal program's premiums, co-payments and deductibles, as well as out-of-pocket prescription costs. The estimate doesn't factor in costs for most dental services or long-term care, such as living in a nursing home.

The company's projection has fallen 12 percent from its high of $250,000 in 2010. But Americans continue to drastically underestimate how much money they're likely to spend on health care in retirement. A recent Fidelity poll of people in their 50s and 60s found that nearly half of respondents think they will need just $50,000 to cover medical expenses.

But the financial burden remains a serious concern. A recent survey by Merrill Lynch found that health-care expenses were the No. 1 worry among people preparing to retire. Three of five retirees surveyed said they had been forced to retire earlier than expected because of a health problem.

"This is a generation that is living longer than any previous generation, and because of that longevity they have a whole new set of risks they're worried about," said David Tyrie, managing director of Merrill Lynch's personal wealth and retirement business.

Here are some initial steps to help prepare for medical expenses during retirement:

Talk to a financial planner: The amount of savings needed for medical care can vary depending on whether seniors continue working during retirement or retire before they become eligible for Medicare.

The Employee Benefit Research Institute, an independent nonprofit, recommends working with a financial professional to develop a retirement plan that factors in medical bills.

"In general, people need to sit down and figure out what they want and talk to a financial planner to realize their goals," said Paul Fronstin, the institute's director of health research and education.

In its most recent estimate, EBRI projected that a couple with typical drug expenses would need $163,000 for a 50 percent chance of covering all medical expenses in retirement and $283,000 for a 90 percent chance.

Consider a health savings account: Offered by many employers and financial institutions, these are one of the best vehicles to begin saving for medical costs in retirement. Workers can begin contributing to the accounts while they are younger and generally healthier. The money is invested tax-free and rolls over each year, even if you change employers. Unlike retirements accounts, withdrawals are not taxed as long as the money is spent on health care.

Health savings accounts are currently available only to people enrolled in high-deductible health plans. They are generally a good idea for people with few health care needs.

Consider an annuity: This can be a useful investment tool to cover health care costs. With a deferred annuity, a person can set aside a large amount of savings in return for a steady stream of payments in the future. The advantage is that an annuity provides a guaranteed minimum monthly payment, no matter what happens to the value of the principal investment.

A couple that knows they are likely to face $220,000 in expenses over their retirement could set up an annuity to provide about $11,000 annually over 20 years. The downside to an annuity, versus a health savings account, is that withdrawals are taxed as income. Annuities can be very complex, and investors must do their homework about the related fees.